Playing the Indian Card

Tuesday, June 03, 2008

Invest in Egypt, Not China.

Here’s an interesting thought, from a CIBC analyst. High oil costs mean high shipping costs. This may go some distance in wiping out China’s competitive advantage in manufacturing. China’s markets are mostly very far away.

Just when it seemed gone forever, Will manufacturing begin to return to North America and Europe?

It could. Actually, it could begin to return today, if either area introduced a very liberal guest worker program. It’s a lot cheaper to bring the people to North America to build the products, than to bring the products.

But can oil maintain its current high price? I don’t think so. At the present price, too many previously unprofitable sources become profitable—oil sands, oil shale, oil from coal, not to mention nuclear power. Once these sources come on line, the price will necessarily come down.

But this will take time. Meantime, China’s economy may take a big hit from this temporary oil shock. Meantime, with the price of basic foodstuffs also rising rapidly, this will hurt in China more than it might otherwise. If, as I suspect, China’s economy is largely a soap bubble floating over a pin, this could be a big crash, involving the fall of the current regime.

By the time all the pieces are pulled back together, China may be well behind India, with its outsourcing, economically. Latin America and North Africa should also boom, as labour there is still cheap, but manufacturing there requires much less transportation to get to major markets. There’s a lot of good labour in Egypt, Turkey, Morocco, Mexico, Argentina, and Brazil.




Some folks are certain that the current high price of oil—and the current high price of food—are inevitable signs that we are running out. Running out of oil, and running out of arable land. If so, the problem I outline above will be permanent; China goes down for the foreseeable future. But this is certainly not so. If it were a case of supply gradually outstripping demand, the price would rise gradually. What we see instead is a sudden, dramatic spike. Only two things can cause that kind of sudden market movement: a speculative bubble, or government action.

The spike in cost of food can be readily explained by the price of oil. Not just from higher transportation costs—the sudden shortfall in food stocks can be explained twice over, mathematically, by a shift in agricultural production to ethanol. Government action, largely.

As for oil, we’ve seen it before, haven’t we? Prices suddenly go way up, to milk the market, then fall just as fast in time to prevent new oil sources from coming on stream. It’s called a cartel. Government action.

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